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Mixed Messages Cloud Mexican Energy Policy, but Companies Work Undeterred

UK-based Ophir Energy plc said this week it has discovered hydrocarbons offshore southeastern Mexico at a well operated by partner Murphy Oil Corp., with further drilling underway to determine commerciality. Though sometimes hard to see, and despite conflicting messages from the new government, the energy business in Mexico pounds on.

There are currently 76 oil companies from 20 countries operating in Mexico. These comprise 39 Mexican-based and 37 foreign firms, according to upstream regulator Comisión Nacional de Hidrocarburos (CNH). In the natural gas business, 23 marketers reported transactions to the Comisión Regulador de Energía (CRE) in January.

The official mandate is that state oil company Petróleos Mexicanos (Pemex) be given additional funding and room to increase production, revenue and market share. At least so far, this hasn’t halted the work of private sector companies; it might even be making their job easier.

“Companies have benefited from the ‘streamlined regulations’ approach now applied to Pemex,” energy analyst Gonzalo Monroy told NGI’s Mexico GPI. “The administration has eased obstacles, whether it’s about importing machinery or other equipment, to submitting an exploration plan. For companies already in Mexico, those with a contract, operational risk may actually have been reduced” under the new government. However, political risk has increased, if only “marginally, so far.”

President Andrés Manuel López Obrador has said he will do what it takes to rescue Pemex, where oil production in January averaged 1.62 million b/d, the lowest level since at least 1990. He wants the company to hit 2.4 million b/d by 2024, when his term ends. Pemex CEO Octavio Romero has said Pemex natural gas production will increase by 50% during his term, to around 5.7 Bcf/d.

Just how this will occur and what great changes will be made, 100 days into his administration, still remains unclear.

For example, Energy Minister Rocío Nahle said in January hydraulic fracturing (fracking) would be permitted, under strict environmental and technological guidelines, to promote natural gas development in the country’s prospective shale fields in the north. Pemex’s own budget has allocated around $170 million for three unconventional pilot projects in the Burro-Picachos, Tampico-Misantla and Burgos basins.

But the president has consistently repeated that his government will prohibit fracking, contradicting the words of his own energy minister.

The lack of transparency surrounding the $8 billion Dos Bocas refinery, a project the president promised for his home state of Tabasco during campaigning, is perfect evidence of the confused message coming from the highest reaches of government.

On Monday, well-regarded Deputy Finance Minister Arturo Herrera told the Financial Times that the $2.5 billion budgeted for the refinery this year would instead be channeled into exploration and production to help Pemex turn around years of decline.

Herrera suggested that ballooning cost estimates at the refinery meant it was an unwise investment for the most indebted oil company on earth; some analysts have said the cost of the refinery could reach as high as $13 billion. “We will not authorize [construction] until we have a final figure that is not very different from the original $8 billion,” he said.

The following day, at his routine presidential morning press conference, the indefatigable López Obrador said spending on the refinery would go ahead as planned. He even said a tender for works would be held on Monday (March 18), a date that commemorates the 1938 nationalization of the oil industry.

There is also general confusion around whether new Pemex farmouts will occur or not.

“Contradictions inside the administration have become more visible, especially between the politically-motivated and those with a reality-based approach,” Monroy said. “For Pemex, the national oil company has utilized the asymmetry of information to push for its projects, such as fracking, and may well get away with it as long as it does not create a political cost for the government.”

Also amid the "asymmetry of information," the energy reform remains very much in place, Mexican regulators continue to do their job, and private companies still have room to be successful across the energy chain.

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